Roles, responsibilities of main parties to a syndicated loan for financing vessel purchase, operations (1)
By Foluke Akinmoladun
Syndicated loans became a feature in shipping finance because it became harder and harder for single lenders to lend out large sums of money and absorb the attendant risk. Borrowers need high leverage to increase their return on investment and internal rate of returns thus creating a demand for more and more leverage.
Syndicated loans thus arose where the ship finance required too large a loan for a single lender or when a project needs a specialized lender with expertise in a specific asset class. A syndicated loan, also known as a syndicated bank facility, is therefore, the provision of finance by a group of lenders, who are commonly referred to as a syndicate, that work together to provide finance for a single borrower.
By having multiple lenders coming together to syndicate a loan for a single borrower, the lenders are able to spread the risk and also partake in the financial opportunities that may be too large for their individual capital base. Interest rates on this type of loan can be fixed or floating, based on a benchmark rate such as the London Interbank Offered Rate (LIBOR), the needs of the borrower and the market. The borrower can be a shipping company, a special purpose vehicle set up to warehouse risk and insulate the ship owner or it could be a project with respect to the operations of a large shipping company. The loan can involve a fixed amount of funds, a credit line, or a combination of the two.
The loan made to the single borrower is usually structured, arranged and subsequently administered by one or two banks within the syndicate. These are commonly referred to as the “arranger(s)”. The Arranger(s) receive/s agency fees in addition to the shared fees among the syndicate partners.
The shipping loan agreement for a syndicated loan can be complex but first the term sheet is negotiated followed by the loan agreement itself. A term sheet is a short version of a full loan agreement used by the negotiating parties to settle on the key terms such as base rate, repayment profile and maximum loan amount. The term sheet is passed along to the relevant legal team and serves as a foundation for a full contract, that normally runs for more than 100 pages.
In its simplest form, a shipping loan agreement is a contract that documents the lender’s obligation to advance the loan (if certain conditions are met) and the borrower’s obligation to repay that loan with interest. The loan agreement is designed to ensure the loan is utilised for its proper purpose and to protect the lender’s security in the ship that is being financed.
Types of syndicated loans are club deals with up to 3 syndicate banks with fees equally shared and one bank receiving agency fees; best efforts, where the arranger does not guarantee the entire amount; or underwriting where the arranger guarantees the entire loan amount irrespective of whether they will be able to sell out part of the loan or not.
The main parties to a loan syndication differ from one transaction to another but typically include the following participants. Firstly is the Borrower, who seeks the loan and is responsible for repayment of principal and interests. Next is the Arranger/Lead Bank who is responsible for structuring the loan and the Underwriting Bank, which is optional, who guarantees that the entire loan amount that made available to the Borrower. Then there are the Participating Banks/Lenders who lend a portion of the total amount required and the Agent bank who is responsible for the administration of the loan for example, disbursements, repayments. Finally, there is a Security Trustee that is responsible for holding the security for the loan on behalf of the lenders.
The bank that manages the pooled facilities is known as the Ranger Bank or Leading Bank, and is also called the Lead Manager, the Syndicate Lead or the Mandated Lead Arranger. The Arranger is mandated by the borrower based on prior discussions and agreed terms, to organize funding based on specific agreed terms of the syndicated loan. This bank scouts for other lending parties who are willing to participate in the lending syndicate and share the lending risks involved.
The main responsibility of the Arranger therefore, is to prepare the syndicated loan documents, advise the borrower on what suits him and his project based on project needs and available facility types. In addition to searching for other banks to be involved in the financing of the loan and the composition of the group, the Arranger also discusses the terms of the loan with the borrower and the banks participating in the financing. The financial terms negotiated between the arranging bank and the borrower is contained in the term sheet.
Foluke Akinmoladun is the Managing Solicitor of Trizon Law Chambers Nigeria. She is a lawyer, accountant, mediator and arbitrator. She is also a Chartered Secretary and Business Rescue & Insolvency Practitioner.
She belongs to the panel of neutrals of numerous arbitral institutions.She was a onetime Director General of the African Ship owners Association of Nigeria and is a member of the Presidential National Action Committee on Nigeria’s Implementation of the African Continental Free Trade Agreement (AfCFTA) (Transportation stream). She is the secretary of the Lagos Chamber of Commerce (LCCI) Maritime Sector. She can be reached at: Foluke.A@trizonlawchambers.com
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